Grzegorz Peszko
Environmental Finance Program ManagerNMC Division, OECD Environment Directorate
FINANCING STRATEGIES FOR FINANCING STRATEGIES FOR WATER AND ENVIRONMENTAL WATER AND ENVIRONMENTAL
INFRASTRUCTUREINFRASTRUCTUREGlobal Forum on Sustainable Development Global Forum on Sustainable Development
Paris 18 December 2003 Paris 18 December 2003
… to achieve the water and environment-related international development goals in the Millennium Declaration?
Worldwide estimates for water-related MDGs: additional $16Bln p/a (GWP), $9Bln to $30Bln p/a (WB), $25Bln p/a (Wateraid).
Uncertainties about interpretation of the MDG goals, assumptions, costing methodologies remain
But no panic necessary - costs are not magic figures cast in stone, depend on how we want to achieve MDGs, what exactly this imply in the field, and when.
Catastrophic cost estimates breed inaction
Do we know how much we need?Do we know how much we need?
Rescheduling or modifying targets
Finding cheaper ways of achieving given targets
Knowing better how much we spend already to achieve the MDGs targets
Increasing and diversifying finance
Bridging financing gaps to meet MDGsBridging financing gaps to meet MDGs
Focus of this presentation
How much we spend? How much we spend?
Total PAC expenditures in the range of 0.8 to 2.8% (Poland) of GDP
PAC investments in the range of 0.9% - 3.8% (Czech Republic) of GFCF
Growing share of current expenditure
Uneven but progressive application of PPP and UPP
Developing countries: Estimates of present expenditures in water sector: $10Bln-$80Bln/a
OECD: Pollution Abatement and Control expendituresOECD: Pollution Abatement and Control expenditures
Different classifications and definitions used
Problems with double counting: expenditure data “by abater” and “by financier” principle
Treatment of specialised producers (e.g. utilities)
Problems with comparing “apples with oranges”: e.g. expenditures with costs, investments with total
Problems with discretionary judgments – e.g. integrated technologies
Problems with data coverage: cross-country comparison and time trends difficult
We do not know well how much we We do not know well how much we spendspend
Environmentally Extended Expenditure Environmentally Extended Expenditure in Selected Economies in Transition in Selected Economies in Transition (as share of GDP in 2000)(as share of GDP in 2000)
Source: OECD0 1 2 3 4 5 6
Moldova
Kazakhstan
Ukraine
Russian Fed.
Georgia
Uzbekistan
Armenia
Turkmenistan
Kyrgyz Republic
Azerbaijan
Estonia
Romania
Bulgaria
Latvia
Lithuania
Slovenia
Czech Republic
Poland
Slovak Republic
Hungary
Germany
Portugal
%
Environmentally Extended Investment Environmentally Extended Investment Expenditure in Selected countriesExpenditure in Selected countries(as share of GFCF in 2000)(as share of GFCF in 2000)
Source: OECD 0 2 4 6 8 10 12 14
Russian Fed.
Georgia
Ukraine
Armenia
Uzbekistan
Turkmenistan
Kyrgyz Republic
Azerbaijan
Moldova
Romania
Bulgaria
Lithuania
Poland
Czech Republic
Hungary
Portugal
Germany
%
National and sub-national governments
Local governments
Local communities
Service providers (specialised producers)
Private intermediaries - institutions of financial and capital markets
International financial institutions
Foreign governments (ODA, export credits)
Who finances and who ultimately pays?Who finances and who ultimately pays?
Users
Domestic taxpayers
Foreign taxpayers
Future users The poor
(for low level of infrastructure services)
Data by financing sources not collected systematically even in OECD countries
Transfers are difficult to trace (especially subsidies)
Bu
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hat
are
wei
gh
ts o
f d
iffe
ren
t so
urc
es?
Operation and maintenance – to ensure sustainability
Return on investments and debt service – to attract commercial finance
Financing capital investments is not Financing capital investments is not enoughenough
… but no paradigm shift around the corner
Every financial institution has a role to play with large menus of financial products
Smart blending needed, leveraging, not crowding out
Constituency for efficiency, especially in public sector
Realism and innovations, rather than “one size fits all” solutions
No magic bullet, such as public budget, ODA or private sector participation, will alone hit the MDGs
Strategic, realistic and systematic approaches to exploit synergies between financial sources needed – financing strategies
Reforms and innovationsReforms and innovations in financi in financial al architecture neededarchitecture needed
ONE POSSIBLE ONE POSSIBLE MODELMODEL FOR DEVELOPING FOR DEVELOPING FINANCING STRATEGIES: FINANCING STRATEGIES: „FEASIBLE”„FEASIBLE”
Affordability assessment
In most FSU and in China baseline finance is not sufficient to cover even regular O&M and modest infrastructure development targets
Policy and institutional failures are usually responsible for low investments and funding
LESSONS LEARNED FROM «FEASIBLE» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING STRATEGIES
Shares of different sources in financing Shares of different sources in financing water and wastewater utilitieswater and wastewater utilities
0%
20%
40%
60%
80%
100%
Novgorod PskovKaliningrad
oblastRostov MoldovaGeorgia Ukraine KazakhstanEastern
Kazakhstan
User charges Public budgets Other
Sichuan Province
Source: OECD, data from the base year of analysis
User fees – the key to any sustainable financing system of water and environmental infrastructure
No sustainable alternative to cover operational and maintenance costs (typical full cost coverage in OECD countries)
Increasing coverage of investment costs (e.g. return on equity) and debt service precondition to attract external private finance
Governments need to ensure that tariffs are established at realistic and affordable levels, often in the face of political opposition
Lessons learned from FEASIBLE Lessons learned from FEASIBLE financing strategies: Users must payfinancing strategies: Users must pay
Users often are able to pay (ATP) more - affordability benchmarks vary
Willingness to pay (WTP) can be higher or lower than ATP; WTP can be influenced by policy.
Another bottleneck: willingness to charge by government (WTC).
Models of social safety nets income support to households or regions cost/price subsidies mixed
Can users pay?… Want to pay?Can users pay?… Want to pay?
Provision of pure public goods and subsidising quasi private goods (e.g. drinking water, district heat)
Correction for externalities (wastewater, solid waste – financing incremental costs)
Market creation (regulation, institutions building)
Market access (risk sharing, credit enhancement, subsidies)
Social safety nets
Governments (taxpayers) will always Governments (taxpayers) will always have to payhave to pay
Financing water/environmental infrastructure in developing countries still at infant stage, but growing
Benefits: more sustainable than public budgets and ODA, reduce currency mismatches
Maturity mismatch a problem: access to long term savings
Credit market architecture a problem: low institutional capacity, no credit record, disclosure of financial information, rating
Local finance a problem – unclear responsibilities not matched with access to revenues, unclear property regimes, ineffective supervision of local borrowing
Risk profile difficult to estimate. Interim risk sharing with public sector needed. Clear risk allocation and enforceable contracts are part of enabling framework.
Local Local financialfinancial and capital markets and capital markets
Important role in capital investments Demonstration and catalytic function –
quality of projects Engineering, financial and management
discipline Paving the way for greater reliance on debt
financing – risk mitigation
Development of long term local credit systems
International financial institutions (IFI)International financial institutions (IFI)
Service providers (it costs, but gains are efficiency, financial viability, know-how transfer)
Usually management rather than financing solution.
Credit enhancement of public utilities
Equity and strategic management
Need for effective regulation of private monopoly
Private operators and strategic Private operators and strategic investorsinvestors
Generally decreasing, but some regions are politically trendy
Emerging trend to use donor assistance to finance sustainable local financial mechanisms rather than individual projects
Untied procurement became common
More strategic perspective needed (commitments for multiyear programs rather than individual projects)
Better integration between investment support, TA and support for policy reforms
Development assistanceDevelopment assistance
Good data and information essential
Unrealistic targets can undermine progress and breed cynicism
water supply and wastewater infrastructure need to be integrated
Financing strategies are no self-fulfilling prophecies - need to be implemented (policies, institutions, instruments)
Good governance, right policies and regulations are as important as finance
LESSONS LEARNED FROM «FEASIBLE» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING STRATEGIES
Without specific incentives, infrastructure will be excessively costly and inefficient
Strategic framework needs to be filled with rolling mid-term investment program and solid project pipelines
FEASIBLE analyses already made impacts in many countries:
More transparent, rational dialogues
More realistic targets
More diversified financing
LESSONS LEARNED FROM «FEASIBLE» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING STRATEGIES
“FEASIBLE-1Beta” Excel model has been available as public domain and widely used for 2 years.
“FEASIBLE-2” in testing. Fully operational in public domain since January 2001.
For publication “Financing Strategies for Water and Environmental Infrastructure” visit www.SourceOECD.org
For information how to receive the FEASIBLE model and users manual visit:
To get more information on country studies in FSU and download documentation, visit visual projects database at: http://oecd.hybrid.pl
ACCESS TO ’FEASIBLE ’ TOOLKITACCESS TO ’FEASIBLE ’ TOOLKIT
www.oecd.org/env/finance
www.cowi.dk/publications/div01pub/index.htm
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